Where Is Bank-Owned Life Insurance on Financial Statements?

Bank-Owned Life Insurance (BSLI) represents a unique financial product within the banking sector, distinct from traditional life insurance policies. Financial institutions primarily purchase these policies to manage various internal costs and risks. Understanding BSLI provides insight into a less commonly known aspect of bank operations and financial planning.

Defining Bank-Owned Life Insurance (BSLI)

BSLI refers to life insurance policies purchased and owned by a bank. The bank is the policy owner, pays the premiums, and acts as the beneficiary. These policies typically insure the lives of a bank’s select key executives or employees, chosen for their significant contribution to the institution’s operations or long-term strategy.

The core mechanism of BSLI involves the accumulation of cash value over time within the policy. This cash value grows on a tax-deferred basis, meaning earnings are not taxed as long as they remain within the policy. Upon the passing of an insured employee, the bank receives a death benefit, which is generally tax-free under current tax laws, provided certain conditions are met. This arrangement distinguishes BSLI from employee benefit plans where individuals are the beneficiaries, as financial benefits accrue directly to the bank.

BSLI is designed as a long-term asset, providing financial advantages and serving as a risk management tool within the bank’s broader investment framework. The policy remains in force even if a covered employee leaves the bank, allowing the institution to continue benefiting from the policy’s cash value growth and eventual death benefit.

BSLI’s Presence on Bank Financial Statements

Bank-Owned Life Insurance is reflected on a bank’s financial statements as a long-term asset. It typically appears on the balance sheet under the “Other Assets” category, or sometimes specifically designated as “Bank-Owned Life Insurance.” The value recorded on the balance sheet is primarily the policy’s cash surrender value (CSV), which represents the amount the bank would receive if it were to surrender the policy. This cash surrender value increases over time as premiums are paid and investment earnings accrue within the policy.

The accounting treatment for BSLI is guided by Accounting Standards Codification (ASC) 325-30. This guidance dictates that only the amount realizable from the insurance contract as of the balance sheet date, which is the cash surrender value less any applicable surrender charges, should be reported as an asset. The increase in the net cash surrender value of a BSLI policy is recognized periodically as non-interest income on the bank’s income statement. This inclusion reflects the tax-exempt growth in the cash value and any tax-exempt death benefits received.

For regulatory reporting purposes, such as Call Reports, banks must accurately reflect BSLI holdings and their associated values. The cash surrender value is updated regularly, often quarterly, or upon receipt of revised data from the insurer to ensure accuracy. While the cash value growth is tax-deferred and death benefits are generally tax-free, the premiums paid for BSLI policies are typically not tax-deductible. Banks must also adhere to Internal Revenue Code Section 101(j) requirements to ensure the tax-free treatment of death benefits from employer-owned life insurance contracts.

The Strategic Purpose of BSLI for Banks

Banks utilize BSLI for several strategic reasons. A primary motivation is to informally fund future employee benefit obligations. These policies can help offset the costs associated with non-qualified deferred compensation plans, executive retirement plans, and other post-retirement benefits offered to key employees. The cash value accumulation within BSLI provides a stable funding source that can be accessed to meet these long-term commitments.

BSLI offers significant tax efficiency. The policy’s cash value grows tax-deferred, and death benefits received by the bank are generally tax-exempt. This provides a substantial tax advantage compared to other forms of investment income. This tax-favored status allows banks to enhance their after-tax returns, making BSLI an attractive option for long-term capital accumulation.

BSLI also plays a role in capital management for banks. As a relatively stable and liquid asset, the cash surrender value of BSLI contributes to a bank’s overall capital base. Regulatory frameworks, such as those derived from Basel standards, require banks to maintain certain capital levels against their assets. BSLI can be considered a high-quality asset that supports these capital requirements, particularly for Tier 1 capital, helping banks meet regulatory expectations and maintain financial strength.

BSLI can contribute to portfolio diversification and yield enhancement. Compared to some traditional bank investments like municipal bonds or U.S. Treasuries, BSLI policies can offer competitive tax-equivalent yields. Incorporating BSLI into a bank’s investment portfolio can provide a different risk-return profile, potentially smoothing overall investment returns and enhancing the bank’s non-interest income. This diversification helps manage investment risk across the bank’s asset holdings.